The Small Business Credit Card Processing Guide

Credit Card Processing

It’s no secret that credit card processing is a must for small businesses. Maybe long-established niche restaurants and local tourist hot spots can get by directing customers to ATM machines to take out cash, but for the rest of us more payment options are almost always a plus if we can manage the costs involved.

This guide is all about options and costs. It will help you understand your small business credit card processing needs by focusing on the available ways to accept credit cards at your small business, the credit card processing fees you can expect to pay, and the thornier issue of choosing a credit card processor—all subjects you’ll need to explore to get started.

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Credit Card Processing Benefits

With all of the payment options, processing fees, and pricing models to consider, you might be wondering if it’s even worth it to accept credit cards at your small business.

We think the answer is “yes” (despite the sometimes forbidding costs) because accepting credit cards brings numerous perks and benefits that won’t otherwise be available to your business.

We’ll discuss some of those key benefits in the section below:

  • More sales
    U.S. consumers overwhelming prefer making purchases with credit cards and debit cards vs. other forms of payment, including cash. That means you’ll likely make fewer sales if you don’t accept credit cards and debit cards than you would if you did, simply because some potential customers won’t even bother to throw their business and money your way.
  • Higher sales
    People also tend to spend more money when they pay with a credit card. Maybe that’s because the money seems less “real,” or maybe it’s because it’s simply too inconvenient to run to the ATM machine to take out cash for that high-dollar item, but, in any case, most small businesses can expect their average ticket to rise when they begin accepting credit card payments.
  • Streamlined accounting
    Handling cash isn’t always easy. You have to store it and keep it secure, and you have to transport it safely to the bank. And, between accepting a cash payment and depositing that money in the bank, all sorts of problems can arise. Incorrect change. Counting errors. Employee theft. These are problems that practically dissolve when you take most of your payments in non-cash forms, such as credit cards and debit cards because your payments appear on your monthly processing statement.Additionally, accepting credit cards comes with the option to use a point-of-sale (POS) terminal that can combine the basics of credit card processing with software that can help you manage your accounting, inventory, employee time clocks, and more.
  • More Sales Options
    However, the clearest benefit of accepting credit cards at your small business is the options it brings to the table. If you don’t accept credit cards, you’re pretty much chained to a physical store where you can accept face-to-face cash payments. But modern consumers (and the modern economy) increasingly prefer other, non-traditional ways to interact with small businesses, such as mobile payments for deliveries and online payments through a website or E-marketplace.

In fact, this last point (more options) is particularly important now when small businesses are faced with the ongoing effects of the Covid19 outbreak. When we finally weather that storm, we’ll likely return to an economy driven by consumers still hesitant to go out or handle germ-ridden cash.

By outfitting your business to take orders and accept payments online, or by providing contact-less card payment options while out making deliveries or taking payments at your checkout counter, your small business will go a long way toward redefining itself and thriving in the post-Covid19 economy.


Processing Options for Your Small Business

It’s easier than ever for a small business to accept credit card payments. Whether you’re an established brick-and-mortar store looking to attract new customers, a one-person web design business, or a hobbyist who needs to accept mobile credit card payments at farmers markets, the card payment industry provides options to fit your needs.

In general, your options break down into three broad categories: in store, mobile, and online credit card processing.

  • In-store credit card payment methods include your traditional “wired” credit card payment terminals, wireless terminals, and more sophisticated point-of-sale (POS) systems that combine payment acceptance with higher-order functions like tracking inventory, accounting, and sales data.
  • Mobile credit card payment methods typically involve pairing a mobile processing app with hardware that turns your smartphone or tablet into a mobile credit card reader.
  • Online credit card payment methods, on the other hand, involve business websites or E-marketplaces paired with a payment gateway that encrypts card information and transaction data.

Naturally, these categories overlap. Some small businesses with physical locations use mobile credit card readers in place of a traditional counter-top terminal, just as many small businesses process in-store payments with a credit card terminal and online payments through a website or E-marketplace.

In any case, you’ll want to tie your methods of accepting credit card payments to the ways you actually do (and want to do) business. This will help you determine the type of hardware and software you need in advance of shopping around for the right payment processor. It will also put you in a better position to evaluate a credit card processor’s terms, rates, and pricing models.

Interested in a more general account of the various ways to accept credit cards? Check out our overview of How to Accept Credit Card Payments for a discussion of mobile payment options, online payments, and more.


Choosing a Payment Processor

From a merchant’s perspective, the key player involved in the credit card payment process is your small business’s “credit card processor” or “payment processor” (these are equivalent terms). This is the company that manages your end of the credit card payment process, and it’s mission-critical to find the right fit for your small business.

In general, your credit card processor will provide your processing contract, including the terms you’ll abide by and the fees you’ll pay, and it will also provide the crucial access to the merchant account your business will need to process credit card payments.


What Is a Merchant Account?

A merchant account is a “pass-through” bank account where the funds from card payments sit while your credit card processor communicates with the various banks and credit card networks involved in each transaction. It isn’t an account you can access, and it may not even be an account you own (more on that later), but in any case it’s a basic requirement of credit card processing you’ll need to explore.

Your small business can get access to a merchant account in one of two ways:

  • by setting up a dedicated merchant account with an acquiring bank (though this will typically happen indirectly through your credit card processor), or
  • by signing up with a payment processor that provides aggregated merchant accounts.

With a dedicated merchant account, you’ll be the account’s owner, and the merchant account will only process credit card payments for your business.

With an aggregated merchant account, you’ll actually be just one of numerous businesses that process payments through that account. The account’s actual owner will be the credit card processor (such as Stripe or Square) that you hired to process your credit card payments, and you’ll be one of the account’s many “sub-merchants.”


Credit Card Processing Fees

The biggest challenge to accepting credit cards at your small business will be the costs involved, and, like everything else, your overall costs will depend heavily on your credit card processor.

However, most of your credit card processing fees will be set in advance by credit card networks like Visa, Mastercard, and American Express. The costs they determine—often called “wholesale fees”—consist of interchange rates that get paid to your customers’ card issuing banks and assessment fees paid directly to the credit card networks. Taken together, these wholesale fees will make up about 75% to 95% of your overall processing costs.

What remains is your credit card processor’s tiny slice of the pie, and it’s the only place where your small business has any room to negotiate what you’ll pay.

In general, credit card processors make their money from through “markups” on each transaction combined with flat fees for the services they provide. But the fees you’ll pay will vary from payment processor to payment processor, and the form those fees take will vary as well.

Below, we’ll simply provide an overview of the 3 most common credit card pricing models you’re likely to encounter when choosing a credit card processor for your small business (and you can find a more comprehensive account of each pricing model here).

3 Credit Card Pricing Models

  • Flat-rate pricing

    The flat-rate pricing model is one of the most typical model you’ll encounter when you do business through E-marketplaces or accept mobile payments through a payment aggregator. The model typically consists of a fixed markup that applies to every transaction (though some types of transactions, such as card-present and card-not-present transactions) might qualify for different rates.

    In general, the idea behind flat-rate pricing is to provide a simplified markup that’s easy for anyone to understand.The trouble, though, is that you might end up paying far higher transaction fees, on average, than you would pay if your small business secured interchange-plus pricing through a dedicated merchant account.

  • Tiered pricing

    Tiered-pricing models organize transactions into different types or “tiers,” usually based on the level of risk they pose, and apply a different markup to each tier. For instance, basic card-present debit card payments might qualify for the tier with the lowest rate, while card-not-present transactions, rewards credit cards, and payments to high-risk merchants might “downgrade” to tiers with higher rates.

    The details are messy, and they’ll differ from processor to processor, but the idea is to provide a simplified pricing model that merchants can understand without mastering the subtle details of interchange rates and card network assessments.

    Only, “buyer beware”: tiered pricing tends to lead to higher overall processing costs, in the end, than interchange-plus pricing because so many transactions downgrade, for all sorts of reasons, to tiers with higher rates.

  • Interchange-plus pricing

    Interchange-plus pricing passes the credit card processor’s wholesale costs (interchange fees and assessments) directly to the merchant, and then tacks on its own markups (along with other service fees, such as monthly fees for maintaining the account). Because the overall costs of interchange-plus plans vary as the interchange rates vary for each transaction, they’re a popular way for small businesses with fairly high sales to save money on processing costs in the long run.

    Interchange-plus plans pretty much always look complicated, on the surface, but all of that complexity is really a sign of the model’s transparency. With a knowledge (and a little math), you can actually figure out where your money is going (whether to your customer’s issuing bank, the card network, or your credit card processor), and so it’s easier to monitor those costs, recognize billing errors and hidden fees, and otherwise judge the value you’re getting from your processing contract.

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